Technology Stocks Look Tired
While we can envision technology stocks making another push higher, we sold our position in XLK based on the four reasons below:
- According to a recent Bloomberg story,
growth prospects for technology companies may be more limited than in the
U.S. technology companies have pushed their dividends to the highest level on record, a signal to investors that profit growth in the industry is slowing. While bulls say bigger dividends are a sign of confidence after 11 straight quarters of rising earnings in the industry left companies with ample funds to compensate shareholders, bears say boosting payouts shows chief executive officers are running out of ways to use their cash.
- A negative divergence tells us upside momentum is waning. The last high in the ratio of tech-to-stocks (XLK:$SPX) came with negative divergences in both daily RSI and MACD. You can see the divergences by comparing the slope line A (price) to the indicators (B and C). Similar bullish divergences highlighted in July helped us participate in a recent rally in oil (USO) and oil stocks (OIH).
- Tech stocks have come a long way off the early June lows.
- Even if technology pushes higher, we believe there are better risk-reward opportunities. We remain bullish, but materials (XLB), commodities (DBC), and precious metals (GLD) may be better positioned for what appears to be never-ending central bank intervention.